Homebuying 201: What is Mortgage Underwriting?
In 2018, the total amount of mortgage debt in the U.S. totaled around $15.42 million. That’s a pretty big chunk of the U.S. economy, which will put out around $20 trillion dollars GDP in 2019.
As the economy continues to expand in the U.S., the mortgage market should continue to grow, too, as more Americans can afford to purchase houses. A mortgage is the most common way to purchase a home in the world, and there’s an in-depth and sometimes lengthy process for a bank to approve a loan to purchase a home.
This approval process is called underwriting, and if you’re new to homebuying, here’s what you can expect next when you’ve been pre-approved for a loan!
What is Underwriting?
un·der·writ·ing | noun
The process through which an individual or institution (a bank) takes on financial risk for a fee.
Whenever a bank issues a mortgage, there is always some risk that the borrower may not be able to pay. Determining this level of risk takes some time — a lot longer than it takes to pre-approve a loan online.
Mortgage underwriting is a specific formula that will weigh your credit reputation, capacity to meet payments and your current assets/collateral to determine if the terms of your pre-approval are worth the risk.
It answers the question, “will we (the bank) be able to make money on this agreement?”
What Happens When my Mortgage Goes into Underwriting?
As soon as you get preapproval for your loan, your lender will want to investigate your background a bit further to accurately weigh the risk associated with your purchase.
Usually, pre approval is a concrete “yes” to a dollar amount the bank is willing to lend, but the underwriting finalizes the terms of your loan by researching your credit, capacity and collateral.
There are four key steps after pre approval that most banks will follow:
1. Income Verification. You probably gave a salary and assets estimate in your mortgage application, but now you’ll need to prove your salary and available cash. The lender will likely several paystubs, bank statements and even tax returns to get an exact number for their credit/capacity/collateral calculation
2. Appraisal. When you’ve selected the exact property you want to buy, the bank will want to know if it is worth the amount you’re ready to borrow for it.
There’s always a chance that you may not be able to afford the mortgage in the future. In that worst-case scenario, the bank wants to be sure that they can make back the money they are owed in a foreclosure. This extra step benefits everyone, though, as it ensures that you will not overpay for a home.
3.Title Search and Title Insurance. This is where a company like Ohio First Land Title comes in! As part of your underwriting, the bank will verify that ownership of the property is 100% transferable. If there is a lien on the title, steps will need to be taken to resolve it.
Prior to this phase, you have the option to purchase title insurance, which covers the cost of correcting any issues that may arise with a property’s title.
4. The Decision. After reviewing data on the lender’s financial readiness and the property’s value, the bank will make a final underwriting decision related to the terms of pre approval.
At this phase, the lender will either accept, walk away or propose new conditions for your loan. When you agree to the bank’s terms based on their findings from the underwriting process, the loan will be officially funded. The, you’re ready to close on your house!
Ultimately, underwriting is the due-diligence that protects both banks and buyers from entering agreements that end badly. While the core purpose of underwriting is to verify that a bank can make money, it is also one of the most important steps to preventing foreclosures and financial hardships for homebuyers.
If you have questions about mortgage underwriting are ready to purchase title insurance, contact Ohio First Land Title today for local service and advice!